All Forum Posts by: Brian Eastman

@Dan Kennerson

As a disqualified person, you cannot lend to or otherwise transact with, benefit from, or provide benefit to the IRA. The only way for you to add capital to the IRA is through normal retirement plan contributions.

Someone who is not a disqualified person can lend to your IRA (or a wholly IRA owned entity like a checkbook IRA trust).

@Dan Kennerson

Your question is not entirely clear.

An IRA can lend.

There is one IRS restriction, which is that the loan cannot be to, or somehow provide any kind of direct or indirect benefit to a "disqualified person". That list includes the IRA account holder, spouse, lineal family, family owned businesses, and a few close financial entanglements like plan fiduciaries and personal business partners.

Otherwise, your concerns about lending with an IRA are the same as those of any other lender. The loan terms must be compliant with and enforceable under state usury laws, you want the IRA's note to be properly recorded and secured, etc.

As a Californian, you probably want to look at alternatives to a checkbook IRA LLC such as a checkbook IRA trust or a Solo 401(k). Nobody really wants to file a CA LLC tax return and pay $800 to the FTB if they don't have to - and you don't have to.

@Michael Baum

The IRS is not specific that you can do "X" and cannot cross threshold "Y".   Everything is interpretation, and you and your counsel get to decide what your risk tolerance is.

What you cannot do is add value to the IRA through the provision of goods or services.

Even deskwork could be viewed as crossing a line if the level of activity is high enough. As a long term landlord, for example, managing a handful of doors would be no issue, but how much work are you doing if your IRA owns 30 doors? Similar with STR. If you are spending 6-8 hours a week managing the property(ies), that could be viewed as providing services to the IRA.

We recommend against self-managing short term rentals in an IRA.

@Wesley Myers

There are two approaches, each of which could make sense based on your situation and goals.

You could take distributions from the IRA as needed to acquire properties personally. As you draw from the IRA, you will pay tax at your marginal rate. Of course, the more you take out at one time, the higher that rate will climb, so you may want to do something like buy one new property per year for several years to spread out the tax hit. In this case, you would own the properties personally.

You could also explore using a self-directed IRA. In this case, the IRA would own the properties and all income would go back into the IRA. This would allow you to potentially continue to grow the IRA if the amount of income the IRA earns is less than the amount you are required to take out. You can choose to take out more than the minimum required amount.

Because the IRA remains tax-sheltered, there are restrictions related to keeping the IRA at arm's length. You cannot work on the properties or otherwise provide services to the IRA, which with STR likely means getting a property manager. A long term rental may be better suited to an IRA because it is more passive and can be self-managed in many cases.

I suggest you do a little research on the self-directed IRA route to see if it makes sense for you. Then, meet with licensed counsel to do a real comparison of outcomes with the personal vs IRA strategy. Depending on how much is in the IRA, you could potentially do a bit of both.

@Mike Dawson

You would want to speak with an expert about fit for a Solo 401(K). If employees are in future plans, it probably does not make sense to go that route, as you would then need to unwind that plan and roll it over to an IRA.

On the surface, the transaction you describe sounds fine. An IRA can lend and receive interest so long as the transaction does not intersect with disqualified persons (yourself, lineal family, etc.).

You can start with an IRA where the custodian acts as the processor and then upgrade to checkbook control in the future. Choose your custodian carefully, however, as not all are willing to support the checkbook control model. If you think you will have multiple assets or any frequency of transactions, you will find the checkbook control will be vastly more usable and cost effective over the long term than using a 3rd party processing agency.

@Daniel Dietz

Off topic, but to get to your separate point... Even in a case with a leveraged IRA investment that generates Unrelated Debt-Financed Income, cost segregation would not provide a benefit. The code specifically requires that straight line depreciation be used.

@Landon Kohlrusch

A self-directed IRA is a great way to diversify your retirement savings away from reliance on the stock market and into an asset class such as real estate where you can have more control over the outcomes.

To be clear, it is not "your first rental property". The IRA is the investor. The IRA pays for the purchase and all expenses of operating the property and the IRA receives all income from the rental or eventual sale of the property. You can be a "fund manager" and make that happen, so you have control over what your IRA is doing, but you cannot benefit currently such as by taking rental income personally.

An IRA can use mortgage financing or joint venture with non-related partners. Your IRA cash cannot be combined with personal cash or cash of close family members like a spouse or parent, however. So, depending on what properties cost in the land of Bucky (My neighbor played hockey at Bemidji), you may or may not have sufficient capital for rental property investing. Another option if not would be to use the IRA as a private lender to other real estate investors or developers.

@Veronica Thomas

As a plan provider, I cannot make a specific recommendation as to a company to work with per BP guidelines.

What I can help you do, however, is refine your question.

Self-directed IRA's come in several formats offered by different types of companies. The type of self-directed IRA that will best suit your situation and goals will drive the process of identifying the right firm to work with.

A self-directed IRA custodian is a processing entity. Think E*Trade or Fidelity with different paperwork. All IRA based plans are required to have a custodian to administer and report on the account. What makes a self-directed IRA custodian different is that they are not purely connected to the public exchanges and limited to investing in stocks, bonds and funds, but rather have the staff training and paperwork to document the IRA's investment in the more individualized transactions that occur when investing in real estate, notes and other non-traditional assets. Such custodians will hold funds, sign documents, issue expenses and receive income on behalf of your IRA and act as your processing layer. This works OK for relatively static and simple investments like a private placement or crowdfund, but can become rather cumbersome and expensive with a more time sensitive and transaction intensive asset such as a rental property. You also need to be aware that custodians are passive in nature and simply process transactions at your direction. They do not provide meaningful oversight or guidance with respect to tax code compliance.

A checkbook IRA LLC is an enhancement on the above structure that is generally more time and cost efficient for investors with a more diverse portfolio. It starts with a self-directed IRA held by a custodian, but the IRA simply makes one investment into a specially designed LLC entity. The IRA owns the LLC, but you can be the non-owner manager of the LLC and have signing authority. This allows you to directly manage transactions via the LLC and eliminates the paperwork, processing delays and per-transaction fees of the custodian. These plans typically cost a bit more to establish due to the legal work, but in most cases will save you considerably over the long term. With a quality provider, such plans also come bundled with meaningful consulting guidance to help you get the most out of the program while staying inside the IRS guidelines.

A similar checkbook program is a Solo 401(k). Such plans are available to those who have some form of self-employment and no full time employees. As an owner-only business retirement plan, the Solo 401(k) has higher contribution limits, allowing you to build your savings on the front end as well as providing investment flexibility. The Solo 401(k) also has the advantage of being more favorable for real estate investments using debt-financing such as a mortgage - as the 401(k) is exempted from a small tax called UDFI that an IRA would pay on the percentage of income derived from the borrowed money.

So, as you continue your research and get feedback here on BP, think about what type of program will best suit your needs and be sure to ask questions along that line. Get on the phone and speak with a few of the providers that are active here on BP. You will pretty quickly be able to tell who is just selling something and who can become a valuable member of your team.

@Scott Holland.  No, that is not what I said.  

I stated "Think E*Trade or Fidelity with different paperwork". Self-directed IRAs have the same back end compliance architecture as a conventional IRA offered by a stock brokerage. What makes a self-directed custodian special is the paperwork and staff training to facilitate investments other than publicly traded assets.

Just like you setup an IRA with, say, Schwab and then push a button to buy shares of Apple, you can setup an IRA with a specialty self-directed custodian and submit paperwork that says "please purchase this mortgage note on behalf of my IRA".

@Matthew Wolk

It seems you are not familiar with a self-directed IRA or 401(k).

With these types of plans you are not withdrawing funds from the plan to personally invest in real estate. The plan is configured to allow for investments into real estate and other non-traditional assets. Your IRA can purchase a rental house instead of just being limited to the stock market.

This type of self-directed plan is what @Sam Peterson is inquiring about.